Accounting Jargon – Our handy glossary to help you understand some of the terminology used by Accountants and Bookkeepers
As an outsourced finance function, we support small businesses with bookkeeping, management accounts and finance director support. We understand that not everyone is familiar with accounting terminology—that’s why they come to us. To help, our Finance Manager, Kayleigh, created this handy glossary to explain some of the most common accounting jargon.
Accounting Jargon – A Glossary
Accruals – Businesses incur costs during a period that they haven’t invoiced yet. These costs may or may not have been paid.
Accrual accounting – Most businesses use this method to match all income and expenses to the period they occur, regardless of when invoiced or billed.
Acid-Test – This liquidity ratio compares a business’s current easily convertible assets to its current liabilities. It shows whether a business can cover immediate liabilities.
Asset – An asset is anything valuable that helps generate profits. For example, a manufacturer might use machinery as a direct asset.
Bad debts written off – When businesses give up on collecting aged receivables (unpaid invoices), they write them off as bad debts.
Cash accounting – Cash accounting is a form of accounting used by limited businesses, usually sole traders, for tax purposes. It looks at when money has been spent and received. You can use accruals accounting for your main records but cash accounting for VAT, which has a few benefits for cashflow purposes.
Confirmation Statement – A Confirmation Statement is a document submitted to Companies House which confirms the identity of the directors and company secretary, as well as the registered office, the shares in issue, the industry of the company, and who has significant control over the company. It does not contain financial information about trading.
Depreciation – Depreciation allocates an asset’s cost over its useful life. This method spreads the cost over the period the asset generates profits.
Disallowable expense – Some expenses count when calculating trading profit but don’t reduce profits for tax purposes.
Dividend – Companies distribute profits to their shareholders as dividends.
Doubtful debt – Businesses create a provision for specific aged receivables (unpaid invoices) they don’t expect to be paid.
General debt provision – Businesses set aside a percentage of total debt to account for unpaid receivables. However, this provision isn’t tax deductible.
What is the difference between Statutory Accounts and Management Accounts? – Statutory Accounts must be filed with the Registrar of Companies and should be for 12 months (except in certain circumstances) and be delivered in specified formats.
Management Accounts are for the Managers or Directors of a business, so that they can monitor performance and make decisions. For this reason they can be much more bespoke, often giving more detail about different product lines/locations etc. and the period reported is often much shorter (generally monthly or quarterly).